What Are The Risks Of Crypto Savings Accounts?

what-are-the-risks-of-crypto-savings-accounts?

There are quite a few popular cryptocurrency savings accounts out there, including options from platforms like BlockFi, Linus, Outlet, and Gemini. These savings accounts are very different from traditional savings accounts, and in more ways than many people realize.

First, investors should remember that cryptocurrency savings accounts are built to accept and hold crypto deposits, including Bitcoin, Ethereum and other popular cryptocurrencies. Not only that, but crypto savings accounts offer much higher rates of return than regular savings, and even high-yield savings accounts.

How much interest can you earn with a crypto savings account? That depends on the platform you use and the type of cryptocurrency you deposit.

As an example, BlockFi lets account holders earn up to 8.6% APY on their crypto deposits. This highest rate currently applies to the cryptocurrencies like the Gemini Dollar (GUSD) and the Paxos Standard Token (PAX), yet you’ll earn more like 5% to 6% with digital currencies like Bitcoin and Ethereum.

In this Photo illustration a Bitcoin logo  is seen displayed...

INDIA – 2021/05/11: In this Photo illustration a Bitcoin logo is seen displayed on a smartphone … [+] screen with a pc screen background. (Photo Illustration by Avishek Das/SOPA Images/LightRocket via Getty Images)

SOPA Images/LightRocket via Getty Images

What’s The Catch? Risks Of Crypto Savings Accounts

While earning 5% to 8% or more in a savings account probably seems ideal, you should know that there are risks involved with this type of account, and with owning cryptocurrency in general. These risks don’t necessarily mean crypto savings accounts are a bad product. However, you should only invest in cryptocurrencies like Bitcoin or use a crypto savings account if you are fully aware of what could happen in the worst case scenario.

No FDIC Insurance

According to Ian Kane, who is founder of a fintech company called Ternio, an immediate risk to consider is the fact that crypto assets do not come with FDIC insurance. With traditional savings accounts, customers are protected on up to $250,000 per account in the unlikely event of a bank failure, yet crypto assets do not offer this protection.

“This means if the company offering the savings account does not also provide the private-keys associated with the wallet where savings are held, then it is possible a user’s funds can be lost if the company goes under,” says Kane.

Loss Of Control

According to cryptocurrency expert Patrick Moore of Crypto What, another major downside is the fact you give up total control of your cryptocurrency assets. 

Moore points out that acquiring a crypto savings account means that one has to relinquish their account “keys” to the lending body. Since the whole crypto system is decentralized, the risk of shenanigans is actually quite high. If the administrator of your crypto savings account lends money to third parties and is never paid back, you could lose all or part of your assets with no recourse.

Cryptocurrency expert and consultant Viputheshwar Sitaraman says giving up your keys is a huge concern regardless. 

“In a normal savings account, the money is yours, full stop,” he says. “But with Bitcoin or other cryptocurrency, if you lose your keys, there is no dedicated company or organization to help recover your wallet.”

More Rules On Withdrawals

If you have a traditional savings account, you can withdraw your money and close your account at any time. However, CPA and crypto expert Mark DiMichael of Citrin Cooperman says this may not be the case with your crypto savings account.

For example, some cryptocurrency savings accounts have withdrawal limits that cap the amount you can take from your account over a specific period of time. These withdrawal limits can put your money out of reach when you need it most, like during a financial emergency.  

Not only that, but you may also have to pay fees to withdraw your money. These fees can add up if you’re an active crypto trader who makes a lot of transfers in and out of your account.

Price Volatility

Meanwhile, Kane says price volatility is another significant item customers should be aware of. If the balance and interest is paid in a dollar-backed stable coin, then it’s easy to account for the interest being paid. However, if the balance and interest is paid in Bitcoin, then Kane points out that the total balance and payments will fluctuate according to market conditions. 

This means that the interest you earn could be worth more or less on any given day. That makes it hard to plan, and to know if your account is truly helping you “get ahead.”

Robert R. Johnson, PhD, CFA, CAIA and Professor of Finance at Heider College of Business, Creighton University, says it’s important to remember that cryptocurrencies are purely speculative vehicles.

“They have no underlying fundamental value and suffer from many weaknesses as any sort of savings vehicle,” he says.  They also routinely experience large price moves in a single day, which makes them a strange and risky asset to grow in a savings account. 

For example, Johnson points out that Dogecoin traded at a high of 0.4223 on April 20, 2021, yet this cryptocurrency traded at 0.1637 just three days later. 

“That kind of volatility is not conducive to a savings account,” says Johnson.

Counter-Party Risk

You have to remember that these “saving” accounts are able to offer you such high yields because they are lending out the crypto you deposit at much higher rates. That leads to some questions – such as who is borrowing at 15 or 20% or more to justify a platform paying you 12% on your assets?

The risk to you as a depositor is that the platform or exchange you are utilizing suffers a wave of defaults on their loans that they can’t cover. The result of a breakdown of the platform could be disastrous for savers with assets deposited.

Should You Open A Crypto Savings Account?

Crypto savings accounts remain popular despite these risks, but why? Simply put, they still offer the potential for higher returns on cryptocurrency, and this is what crypto investors are after in the first place. 

Still, there are quite a few factors to consider before you open one of these accounts and hand over the keys to your digital assets.

First off, Neil Chopra of Fireblocks says consumers should carefully evaluate the platform or app they’re using to ensure that the provider they choose to go with is “compliant, secure, reliable, and reputable.”

Even though cryptocurrency is “newer” in general, you should also consider how long the app or platform has been around, he says. In the meantime, research and look into user reviews and perform due diligence on the background of the company, its investors, and its leadership team.

Second, make sure you’re not betting the farm (or your entire retirement) on crypto investments or their potential savings account returns. 

Bryan Routledge, Associate Professor of Finance at Carnegie Mellon University’s Tepper School of Business, says that a well-diversified investment strategy should always be your goal. 

You do not want to overload your portfolio with any individual stock, and especially Gamestop GME , he says. 

“Think of Bitcoin as you would any other stock. You might tilt your portfolio towards an industry or a company, but just a small amount.”

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